Wednesday, August 25, 2010

A surge in foreign takeovers of income trusts would mean the government's attempt to stem a decline in tax revenue by taxing trusts may have the opposite affect, said Lee Goldman, a money manager at First Asset Funds Inc. in Toronto.

``Where you've seen a Canadianization of the energy industry, it will go the other way, there will be a lot of purchases,'' William Andrew, chief executive officer of Penn West, said in a telephone interview from Calgary.

The decline in Canadian energy income trusts will make them more attractive to foreign companies interested in acquiring natural gas and crude oil assets, BMO Capital Markets analyst Gordon Tait said. The new tax structure also removes a disadvantage foreigners faced when buying a Canadian trust. Under the current rules, a trust would lose its tax exemption if it were controlled by non-Canadians, meaning buyers would be paying for a benefit they couldn't use.

``As some of these assets get sold off and some of these good companies get sold down, you could see more foreign takeovers, in which case you could see a lot of income stripping coming out of Canada,'' Tait said.

Penn West Energy Trust PWT.UN-T signed an $850-million natural-gas joint venture with Japan's Mitsubishi Corp., cashing in on a surge of foreign interest in Canada's most promising energy plays.

The deal is the latest in a string of partnerships that has Asian buyers spending billions on natural-gas properties, which are now attracting nearly as much attention as the oil sands from overseas companies with deep pockets.

South Korean and Chinese investors have also made substantial bets on the prolific Horn River and Montney shale gas plays in northeastern British Columbia. In its deal with Mitsubishi, Penn West is selling a stake in its Wildboy and Cordova Embayment plays, which contain a mix of conventional gas and shale, where gas is trapped in dense rock that makes it more difficult to extract.

Mitsubishi, a Japanese conglomerate with interests in energy, metals, machinery and chemicals, agreed to pay $250-million upfront, and a further $600-million to develop the two properties and take a 50-per-cent share in the properties, which are located in the northeastern corner of B.C. near the Northwest Territories border.

The Mitsubishi deal comes after Penn West signed a similar partnership earlier this year with China Investment Corp., which will pay $1.25-billion for a 45-per-cent stake in northern Alberta heavy oil property.

“A lot of the historic sources of capital have been either the U.S. or Europe, but because of the recession in both those places, there’s just not as much risk capital available,” said Penn West chief executive officer Bill Andrew. “The Japanese and the Chinese – and the Indians and the Koreans to some extent – want to diversify and take on some risk. So they’ve been actively pursuing plays in Canada and elsewhere.”

Those investments have proven a critical source of funds, particularly as companies look to unlock assets that may otherwise not have been developed for years.

The Mitusbishi deal will allow Penn West “to move ahead with very little capital exposure on our part,” said Mr. Andrew.

Natural gas prices have sunk to their lowest levels of the year, hovering just above $3 per thousand cubic feet in Alberta. But low prices have done little to dissuade investors who believe that gas has a bright future in North America, particularly as a relatively clean source of energy compared with coal and oil.

The deal works out to roughly $50,000 per flowing barrel equivalent, a solid valuation despite current gas prices, according to Alan Tambosso, president of Sayer Energy Advisors.

“These are strong prices, and I think they're reflective of a long-term view toward natural gas, and a long-term commitment to this play,” he said.

“Sometimes it’s not a bad idea to start these things in a down part of the cycle and hopefully you’re there if the cycle improves and gas prices recover,” said Gordon Tait, an analyst with BMO Nesbitt Burns.

Mitsubishi joins China National Petroleum Corp. and Korea Gas Corp., which have both partnered with Encana Corp. to speed production of British Columbia’s enormous gas fields. Foreign firms began scouring the country for acquisitions nearly three years ago, Mr. Andrew said, and interest has grown since then. In the U.S., French and Indian companies have also partnered on huge new natural gas plays.

B.C. is attractive in part for the size of its resource. Mitsubishi believes its joint venture gives it access to land that can produce up to 500-million cubic feet a day, just under 10 per cent of Canada’s daily consumption and far more than Japan’s own output. Mitsubishi is buying into lands that currently produce just 30-million cubic feet a day, but the “potential of this enormous resource could greatly exceed Japan’s natural gas annual demand,” the company said in a release Tuesday.

The mounting Asian interest in northeastern B.C. comes as EOG Resources Inc. and Apache Corp. work to build a $3-billion port that would export liquefied natural gas from the West Coast. Those plans have raised the possibility of overseas firms being able to physically take possession of the gas they buy in Canada.

Japan currently relies on natural gas for about 14 per cent of its energy needs, a number it is seeking to boost. Much of its supply currently comes from Indonesia, Australia, Malaysia, Qatar and Brunei. Canada could prove a valuable additional gas source.

3 comments:

Bruce Benson
said...

Canadians are dimwits for allowing the CON government to destroy Canadian companies and Canadian investment in our own country. Foreigners, come one, come all, SALE, SALE, everything on SALE, bargain basement FIRE SALE prices. Canadian Investors be damned. Perhaps even more striking is that Canadians don’t give a shit. They don’t care that foreigners own everything and Canadians are the lowly labours toiling away for their foreign masters. The sell out of our valuable resources continues unabated, Potash is about to become just one more in the long line of disgraceful business ventures.

EVENTS

Income Trust Halloween VigilThanks to all who participated in both the Ottawa and Calgary vigils to mark the anniversary of the announcement.

WE"D LIKE SOME ANSWERS

As you well know, the ‘income trust thing’ has grown beyond the
question of whether fair taxes are paid on income from trusts. It’s
become a giant dirty snowball, and as it rolls forward it accumulates
more and more bulk. There are so many unanswered questions. Let's list a few and invite our "Accountable" government and our free press to provide some much-needed answers.

It is said “Trusts are inefficient use of capital. Why?” Two
related questions are ‘Whose money is it, anyway?’, and ‘Do Canadian
investors have a free and efficient market?’

How can information that is already in the public domain at SEDAR
make for a state secret? How could such information be used to harm
the Canadian national interest? And who would cause the harm?

Why won’t the Canadian media investigate the falsehoods and
misrepresentations told by the Minister of Finance to a committee of
Parliament? Was the Minister in contempt of Parliament?

Why won’t the Canadian media report (a) government tax revenues
gained from BCE in 2006 when BCE was a corporation to (b) government
tax revenues that would be gained in 2007 from BCE, if BCE had been
allowed to proceed to a trust, and (c) government tax revenues that
will be gained in 2007 from BCE, when BCE ownership has been carved
up as 45% foreign ownership and 55% large Canadian pension fund
ownership?